March 2012 - Thoughts From The Frontline

This highly acclaimed blog is primarily focused on private money management, financial services, and investments. John Mauldin demonstrates an unusual breadth of expertise, as illustrated by the wide variety of issues addressed in-depth in his writings.

Last Monday I was in Paris and was asked to do a spot on CNBC London. I arrived at the studios an hour early due to a misunderstanding of the time zones, so while trying to catch up on the news I listened to CNBC. I had just written about Spain in last week's letter and guessed that was what they wanted to talk to me about, but for the full hour before I got on it seemed like every guest wanted to talk about Spain. When I had my turn and indeed got the Spain question, I smiled and noted that we were now in a period when it would be "All Spain All the Time," for at least the next year. I should have noted that there would be brief interruptions where we glanced at Portugal and perhaps Ireland, but the real focus would be on Spain.

This Friday finds me sleeping later than I planned … in the lounge at the airport in Stockholm, on my way to Paris. To the great applause of readers all over the world this may be the shortest letter in 12 years. I will write here and on the plane and quit when I land so I can be with friends this evening. No time for exhaustive research, so we will march through random topics that caught my attention this week until it is time to hit the send button. In no particular order, let's jump in.

Each month investors and politicians in countries all over the world obsess over the release of the monthly employment numbers. Even though these numbers are likely to be revised significantly from the original release, the markets can't help responding to the variations from the expected number. Why the focus on numbers that are likely to be proven wrong in the coming years? Because the single most important factor in the direction of an economy is employment. Consumer spending, personal income, tax revenue, corporate profits, and a host of other variables all swing on rising and falling employment.

Greek is having an "orderly" default. The taxpayers of Europe are in theory going to lend €130 billion to Greece to pay back €100 billion in Greek debt that is owed to private lenders. Greece has to pass several difficult tests in order to get the money. €100 billion of debt to private lenders will be written off. Thus the net effect will be that they owe €30 billion more. How does this help Greece, except that they get €30 billion more they cannot pay?

For every government law hurriedly passed in response to a current or recent crisis, there will be two or more unintended consequences, which will have equal or greater negative effects then the problem it was designed to fix. A corollary is that unelected institutions are at least as bad and possibly worse than elected governments. A further corollary is that laws passed to appease a particular group, whether voters or a particular industry, will have at least three unintended consequences, most of which will eventually have the opposite effect than the intended outcomes and transfer costs to innocent bystanders.